Litigation funders get boost from common fund orders' entrenchment by the courts

In a good result for litigation funders, both the Full Federal Court and New South Wales Court of Appeal have affirmed the power of the Court to make a "common fund" type order in two recent judgments, delivered on the same day.  Common fund orders have the effect of requiring all group members (including the vast majority of group members in open, funded, class actions who do not sign up to the funding agreement) to pay a funding commission to the litigation funder (Brewster v BMW Australia Pty Ltd [2019] NSWCA 35 and Westpac Banking Corporation v Lenthall [2019] FCAFC 34).

Money Max – revisiting the funder's fee

Following the Full Federal Court decision in 2016 of Money Max Int Pty Ltd v QBE [2016] FCAFC 148, it seemed clear that, at least in the Federal Court, common fund orders could be made.  The Money Max decision gave a green light to order the payment from a resolution sum (following settlement or judgment in the applicant's favour) of a funding commission (the amount of which would be determined at or near time of the settlement or judgment when the court had information available to enable it to assess the reasonableness of the funding commission) before the balance was distributed to the plaintiff/applicant and group members. 

However, over two years later the respondent to a financial advice class action (Westpac) and defendant to a consumer product class action (BMW), questioned, from a constitutional law and statutory construction standpoint, the validity of common fund orders.

Do the courts have power to make common fund orders?

Given the importance of the question to the conduct of class actions in Australia, the Full Federal Court and New South Wales Court of Appeal held a historic joint hearing – one of a number of recent procedural steps that the two Courts have taken to improve co-ordination in respect of the management of class actions.  The Courts heard the arguments in both applications at the same time and in the same courtroom, and delivered their separate decisions concurrently. 

The submissions of both defendants were largely consistent, although there were some variations given that the BMW proceeding involved the determination of the question of law as to whether a court has the power to made a common fund order, whereas the Westpac proceeding was an application for leave to appeal a decision to make a common fund order. 

Both appellate courts held unanimously that such orders were valid.The Courts:

• rejected the respondents' submissions that, as a matter of statutory construction, in the absence of clear words, a power could not be implied into the relevant provisions (Civil Procedure Act 2005 (NSW), section 183; Federal Court of Australia Act 1976 (Cth), section 33ZF) which detracted from group members' property rights, namely, the proceeds of a resolution sum. In BMW, the Court of Appeal said that such an interpretation would be incongruous with the opt-out regime in both jurisdictions which permits causes of action to be litigated without group members' consent. In Westpac, the Full Court said that the common fund order enabled the fair distribution of legitimate funding costs to realise common rights. In this part of each decision the courts have taken a broad view of the scope of their residual power granted by the sections mentioned above to make any order which the court thinks necessary to ensure that justice is done in a class action. It seems likely that the nature and extent of this power will continue to be subject to debate;
• rejected the respondents' submissions that a the power to make a common fund order was not available under the Constitution because it was not a judicial power, since it involved the creation of rights and obligations rather than the resolution of a dispute. Both Courts held that the order should not be characterised only as assessing and delivering a funding commission. Rather, as the full Court in Westpac held, the orders involve the court acting incidentally to the resolution of legal rights of the parties and group members to ensure that those rights can be vindicated at a reasonable cost and in an efficient manner; and
• rejected the respondents' submissions that the power involved the acquisition of property other than on just terms, contrary to section 51(xxxi) of the Constitution. The Supreme Court of Appeal in BMW said that that provision has no application where the acquisition is the product of agreement, not the exercise of powers of compulsion. Given that group members had the right to opt out prior to being required to pay a fee to a funder, the Court said that common fund orders operate consensually and not compulsively.

The upshot

As both appellate courts observed, it was common ground in both proceedings that each group member has, at best, only a modest claim for damages, and that only a relatively small number of group members had entered into a funding agreement.

By rejecting arguments that such orders are constitutionally invalid or not available as a matter of statutory construction, the decisions of both appellate courts has further entrenched common fund orders as a judicially approved mechanism for encouraging litigation funders to back class actions in Australia.  This does not, however, mean that such orders will be made automatically (particularly early in the proceedings), as the subsequent Federal Court of Australia decision in Tate v Westpac Banking Corporation (Common Fund Orders) [2019] FCA 405 demonstrates.

As at the time of writing, an application for special leave has been filed in the BMW proceedings.  Given however that common funds were a recommendation of the recent ALRC report, it remains to be seen whether the High Court will have the final say.  

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